Question

Howarth Manufacturing Company purchased equipment on June 30, 2017, at a cost of $175,000. The residual value of the equipment was estimated to be $10,000 at the end of a five-year life. The equipment was sold on March 31, 2021, for $48,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:
1. Prepare the journal entry to record the sale.
2. Assuming that Howarth had instead used the double-declining-balance method, prepare the journal entry to record the sale.

Answer 1

5 year is equal to 60 months

Depreciation expense per month under straight line method = ($175,000 - $10,000) / 60 = $2,750

Accumulated Depreciation from July 1, 2017 to 31 March, 2021 (ie for 45 months)

= $2,750 X 45 = $123,750

Date	Accounts	Debit	Credit
Mar 31, 2021	Cash	$48,000	-
	Accumulated depreciation	$123,750	-
	Loss on sale of equipment ($175,000 - $123,750 - $48,000)	$3,250	-
	Equipment	-	$175,000

b)

Accumulated depreciation

2017  = ($175,000 X 40% X 6/12) = $35,000

2018 = ($175,000 - $35,000) X 40% = $56,000

2019 = ($175,000 - $35,000 - $56,000) X 40% = $33,600

2020 = ($175,000 - $35,000 - $56,000 - $33,600) X 40% = $20,160

2021 = ($175,000 - $35,000 - $56,000 - $33,600 - $20,160) X 40% X 3/12 = $3,024

Total accumulated depreciation = $35,000 + $56,000 + $33,600 + $20,160 + $3,024 = $147,784

Date	Account	Debit	Credit
Mar 31, 2021	Cash	$48,000	-
	Accumulated depreciation	$147,784	-
	Equipment	-	$175,000
	Gain on sale of equipment ($175,000 - $147,784 - $48,000)	-	$20,784